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A special feature for the end of what has a been a big and often controversial year for streaming. Here are the views of 10 CEO’s of of the top streaming services and of the leading multi-room streaming system, on the following two questions:

1 – What was the most important thing to happen to the streaming market in 2012

2 – What is the most important issue that the streaming market must address in 2013

Daniel Ek, CEO and Founder – Spotify

2012: Growth – both in terms of the number of people who are now paying for music again and the growth in payments back to artists as a result. 2012 was the year when people realised the future growth in the music industry is coming from streaming services.

2013: The abundance of choice. How do you make sense out of 20 million songs?

Axel Dauchez, CEO – Deezer

2012: The streaming market continues to progress at breathtaking speed and we’ve seen some incredibly positive developments in 2012. Most exciting for us, is the fact that targeted online content has developed into something much, much more sophisticated than just algorithm-generated recommendations. We’re seeing the focus now shift towards personalised music curation. At Deezer we’ve gone a step further, developing really bold new product innovations that are designed to put integration with apps, social media and digital services at the forefront of our new user experience. Our aim is to help music fans discover and share music and promote new artists. That’s why our local editorial teams work hard to create suggested playlists and recommendations to give music fans a more personal and individual service.

2013: Getting as many people as possible to find out about services such as ours! We’re convinced that the future of digital music will rely on music discovery and re-establishing the emotional connection between music and people. Our mantra is to help people rediscover music, through recommendations by real people all over the world. Our locally-based editorial teams share new music from upcoming local artists, not just in their own countries, but with the other editorial guys around the world – another example of Deezer taking music even further regardless of boundaries. Now our biggest challenge is to get people everywhere to find out how intuitive – and fun! – it is to use Deezer, and we hope to make great strides on this in 2013.

Jon Irwin, CEO – Rhapsody

2012: Looking back, 2012 was the year that streaming became mainstream. We’ve seen a rapid evolution since streaming music was freed from the PC and became a constant companion via smartphones, to this year, when streaming made its way into the living room and into cars—the two places where people listen to the most music. Streaming services are everywhere! This heightened awareness has resulted in more consumers embracing the model and eschewing their old beliefs around the need to own their media; which has given rise to more investment in the sector, innovation around business models and M&A activity. After spending the past 10 years forging the path and taking those proverbial arrows, we are finally seeing the realization of streaming music’s promise.

2013: The most important issue of the mainstreaming of streaming is that artists are paying more attention to how they’re being paid on the various streaming services. Artists are seeing a lot of streams, but are not seeing a lot of cash for them. This makes them justifiably nervous that streaming services are getting popular at the expense of digital sales–and in some cases withholding their music from streaming–a detriment to the growth of these services, just as they become popular. The solution of the problem is twofold. First, we need to do a much better job at education about how artists are compensated and creating transparency around where streaming revenues flow. Streaming services have a responsibility to innovate around artist compensation to get more money into artists’ pockets and help them understand how their music is being consumed. I think there is a lot more that we can—and should—do to ensure that artists are fairly compensated for their music and are extracting maximum value from streaming services.

Steve Purdham, CEO and Founder Investor – We7

2012: Two things, in the UK, the silent landmark in 2012 was the launch of the BBC iPlayer Radio app this has the potential in 2013 to be the catalyst for mainstream adoption of streaming, without the need to know its streaming and secondly the driving momentum of smart phone and tablet adoption reaching what I believe was a tipping point in 2012.

2013: In 2013 the dream would be easier licensing, more flexible pricing plans removing the artificial technical and commercial barriers with the ability to demonstrate clear ROI’s but in reality for any of the models to work they need the true internet scale that is possible and to achieve that we need to find the means to enable mass market adoption. This is the elusive jewel in the crown that we all should be really seeking to solve.

Ben Drury, CEO and Founder – 7 Digital

2012: Streaming cloud locker services from Google and Amazon

2013: Globalised rights

Drew Larner, CEO – Rdio

2012: Social media has had a profound impact on the way music is shared, which is something we anticipated when we first built Rdio. 2012 also saw the entry of services into global markets (with our own service expanding to 17 countries). The continued growth of mobile around the world with faster speeds and better phones also contributed to the rise of music streaming in 2012.

2013: Awareness is still a key factor moving into 2013. We’ve seen a big shift in 2012 with more services opening up globally, but we aren’t truly mainstream yet. Innovating on discovery is a key focus as well. With all the songs in the world at your fingertips, creating fun ways to decide what to play next is a challenge. We built Rdio with human powered music discovery at the heart of the experience and we’ll continue to enhance discovery across platforms moving into 2013. Another key issue moving into the new year is the our responsibility to the artist community. We’ve started to address this through the recently launched Artist Program and will continue to work closely with artists to help them create new revenue streams and tap into new opportunities generated by the streaming music model.

Nick Massey, CEO – Rara

2012: The introduction of frictionless music sharing across social networks has led to a massive increase in the adoption of music streaming in 2012. 62.6 million tracks were played 22 billion times across Facebook in the first 12 months of open graph coming to the network. In the UK UMG reported that 7.5bn tracks had been streamed in 2012 to mid November; a 700% increase on the 1.1bn tracks streamed in 2011.

2013: Despite the huge rise in popularity of streaming, there’s a lot more work to do before the mass market transitions from music ownership to the access based streaming music services. Increasing adoption of tablet computing is making it easier for people to consume digital entertainment content while high speed broadband and 4G mobile networks deliver more data to us faster. However it will be the ways in which streaming services enable simple but engaging access to music through recommendations, sharing and curation which will be key to driving wider consumer uptake in 2013.

Mike Bebel, Head of Music – Nokia

2012: 2012 was a year when many of the mainstream music service providers realized that the typical mobile music consumer is seeking more effortless and delightful entertainment. This is something we had already understood and rolled out to over 20 markets around the globe with Nokia Music, the most satisfying and compelling mobile music experience to date.

2013: In 2013, we expect others will follow our lead and work hard to remove barriers to usage and some have already announced that they also need to solve the consumer issues that we identified long ago. Rest assured that Nokia Music will continue to innovate and deliver the music that people love in the most satisfying and intriguing mobile experiences. We welcome all to discover and enjoy it.

Espen Lauritzen, CEO – WiMP

2012: The beginning of consolidation in the industry, which I believe we will see more of in the coming year.

2013: The big discussion on sustainability of the business model throughout the value chain.

John MacFarlane, Founder and CEO – Sonos

2012: In 2012 we’ve seen streaming services go mainstream. With the proliferation of innovative services such as Spotify, RDIO, Pandora, Rhapsody and QQ, we now have access to more music than ever before. At Sonos we’re dedicated to providing music lovers with the simplest way to enjoy all the music on earth in every room and our partnership with such popular music services has ultimately seen our customers consume twice as much music.

2013:2013 must bring a healthy debate on the value chain of artist to consumer within streaming, and it’s essential that this is resolved to ensure the artist gets paid and the consumer gets a great experience. We are just beginning this dialogue but it absolutely needs to be continued in earnest over the next year.

My take

2012: It was streaming’s big year. Finally the confluence of ubiquitous connectivity, and smartphones and tablets going mainstream has created the necessary market conditions for streaming to step up to the plate. It is still very early days and streaming revenues are dwarfed by download and CD revenue, but finally there is the glimmer of a ‘digital plan B’. The artist streaming debate was a useful coming of age for artists, but too much data has too often been misinterpreted, creating a confused marketplace.

2013: 9.99 is not a mass market price point, somehow (bundling, discounts, pricing innovation, partnerships etc) that price must come down to drive wider adoption. Also the value chain must work out a transparency solution that can work within the restrictions set by commercial relationships. Artists may never get the full picture, but it is in the interest of all parties that they get as much of it as is possible to help them make informed opinions. Finally, the elephant in the room remains YouTube. More catalogue than any of the other services, video (of course), great functionality, on every smartphone and tablet, and all for absolutely nothing. That creates a playing field that is anything but level for the rest.

This July EMI’s Insight division launched an unprecedented initiative to share data from their 850,000 interview Global Consumer Insight data. This dataset covers 25 countries and over 7,400 artists, with twelve people being interviewed at any given moment, 24 hours a day, 7 days a week.

The data is being shared with the data science community in a range of initiatives including forthcoming Music Data Science Hackcamps.
As hard data continues to be something of a scarce commodity for the streaming music debate I decided to mine EMI’s dataset to create a snapshot of global streaming music adoption, and its influence on the broader music market. I have written up a report which you can download for free here. Additionally EMI have given me permission to post the data here so that you can play around the data yourselves. In fact I invite you to go and play around with the data and see if you can find any trends that I missed in my analysis.

Here are some of the key findings from the report (which of course, along with all of the opinions and interpretations are my own and are not, necessarily, EMI’s)

Streaming has a firm foothold. 32% of consumers across the globe are now using streaming services (see figure 1). However, adoption is far from uniform.

Nordics lead the way. Norway and Sweden (the home of Spotify) are respectively the 1st and 3rd most active streaming markets globally. Key to this trend is the relative sophistication of Internet users in these markets. 48% of Norwegians are now streaming music users, as are 43% of Swedes.

Streaming is a good fit for piracy riddled Spain. Spain is the 2nd most active market with 44% streaming penetration. But whereas consumer sophistication was key to Nordic adoption, in Spain piracy and the legacy of free were the most important drivers.

Free is a good fit for France too. The role of piracy and free have also been important in France. French authorities have pushed through the controversial Hadopi legislation but the carrot of Spotify and local streaming success Deezer has delivered immediate results. Translating streaming usage into purchases though is less successful: just 13%.

Streaming Drives Music Discovery and Consumption. Although it is still too early to draw definitive conclusions about exactly how much streaming impacts piracy and sales, the case for driving discovery and consumption is much clearer. 55% of global streaming music users state that they now discover new artists and new music as a result of streaming.

Usage is steady among existing users. Usage among existing streaming users is broadly steady with 19% using streaming more than 12 months previously and 20% more.

Today UK headquartered supermarket chain Tesco announced the acquisition of a 91% stake in UK streaming music service We7. It hasn’t been the easiest of journeys for We7, with the plucky English start-up simultaneously fighting off incursions onto its home turf from the Nordics (Spotify) and the French (Deezer). Which is an uncanny rerun of the last English King Harold I’s annus horibilis 1066 when he fought off the Vikings and before finally losing to the France based (though Viking origin) Normans at the Battle of Hastings. But whereas Harold ended up with an arrow in his eye this isn’t the end of the story for We7.

Tesco might at first sight seem something of an unusual bedfellow for We7, but Tesco has very big digital content aspirations. The We7 purchase follows the acquisition of streaming video service BlinkBox and is another building block in Tesco’s bid to build a paid content offering that appeals to its mass market, mainstream customer base. ‘Mass market paid content’ may be an oxymoron right now but if anyone is going to take paid content mainstream it will most likely be a mass market brand. And yet it will be far from plain sailing for Tesco.

Tesco’s paid content strategy is both aggressive and defensive.

Tesco has been aggressively – and in the main, successfully – pursuing non-grocery revenues for a number of years now. (Though a recent dip in overall revenues has seen a commitment to a renewed focus on core grocery products). Paid content is a product line which would clearly be new revenue opportunity for Tesco and music would be the obvious lowest common denominator hook for pulling consumers into a blended paid content offering. It is a strategy that has worked well for Apple and to some extent Amazon.

The role of Amazon brings us to the defensive play for Tesco. Tesco hasn’t always had the smoothest of relationships with the music industry, particularly the retailing element of it. Like supermarket chains in many other markets Tesco has pursued a strategy of loss leading with a relatively limited selection of front line and classic catalogue CD titles. Its aggressive pricing strategy has helped bring CD prices tumbling down (great for consumers, less good for record label margins) and it has sometimes tried to bend the rules to get stock cheaply (such as sourcing from Eastern Europe). Tesco does all of this because it helps footfall in store and because it helps migrate its customer base up the product ladder from baked beans, to CDs, to computers and so on. All of which is remarkably similar to Amazon’s strategy, the difference being that Amazon use CDs (and books and DVDs) as the entry point on the product ladder. As CD sales decline though the ability to use CDs as a customer acquisition hook diminishes. Amazon knows this all too well, hence its aggressive – but thus far only modestly successful – pursuit of an MP3 store strategy.Now Tesco can see the writing on the wall too.

Selling paid content from the supermarket aisle

The task is more robust for Tesco than it is for Amazon. All of Amazon’s customer relationships are digitized because it is an online retailer. Tesco though, despite being a global leader – at one time the global leader – in online retailing does not have a digital relationship with the majority of its customers transactions. As Amazon will attest, it is already challenging enough trying to persuade customers in an online environment to opt for digital versions of products even when they are positioned alongside physical versions and more cheaply. The task is nigh on impossible in a supermarket aisle. Which is where I think We7 will come in. It is a much more straightforward – though still not easy – task to get customers to visit a free online content destination, such as a streaming music offering, than it is to get them to dive straight into buying digital content.

A smart move for Tesco would be to use We7 to power a free music offering that is available only to holders of its Tesco Clubcard loyalty scheme. This would give customers another reason to opt into the Clubcard scheme if they haven’t yet, and for those that have it would give them reason to start engaging with it online. Once it has customers engaged with free streaming music Tesco then has a much easier task of migrating portions of those consumers to paid digital music, whether downloads or subscription. Tesco has a number of incredibly valuable assets at its disposal to promote usage in both a broad and targeted manner. For example users of the free streaming music offering could be given a free download with every £50 spent at the till. In store integration and promotion would be more challenging but various compelling options exist ranging from voucher cards to digital content bundled with CDs.

In short We7 could and should become the foundation stone of Tesco’s walled-freemium music strategy. Tesco have talked a decent digital music game for years now without notable success. A £10 million investment in We7 could well prove to be a very cheap pass to the big time.

It’s been a busy week for Deezer: first came the announcement of an browser-based streaming partnership with niche music publication Artrocker, then came Deezer’s launch in Canada, New Zealand and Australia – the next chapter in Deezer’s world domination plan. Now to complete a hat-trick of announcements the French streaming service has announced a partnership with T-Mobile in Austria, with the possibility of further Central European roll outs. Of the three announcements this is the one with the greatest strategic significance.

The Third Way for Digital Music

Regular readers will know that I’ve been advocating subsidized and bundled music services for many years now. Bundled services square the circle of more people listening to more music than ever but fewer of them paying than ever before. Bundled music services are the ‘Third Way’ for digital music (see figure). Currently the digital music market is polarized between a fight for the top and a fight for the bottom. iTunes, Rhapsody et al have built businesses around the relatively small group of tech-savvy music aficionados who pay for digital music, while We7, Pandora et al are catering for the appetite of free music fans (though still grappling with how to create profitable businesses with such large chunks revenue going on royalty payments). Lost in between are those music fans who are engaged enough to want more than ad supported, PC-tethered music but who don’t want to pay 4.99 upwards for the privilege. For as long as the squeezed middle remains un-catered for, the total market will remain stuck in decline or stodgily slow growth.

But this macro concept is a business-critical problem for companies Deezer and Spotify who target the top tier but rely on the bottom layer for customer acquisition and brand extension. The problem with using free music as your marketing funnel is that you attract lots of music fans who love unlimited streaming but have no interest or ability to pay a monthly subscription fee. Freemium services need something between free and paid – without it half of their marketing efforts are wasted.

Bundled Services More Often Than Not Don’t Add Up for Telcos

The solution for Deezer and Spotify, as well as for the wider market, is to create bundled services where the consumer pays little or no direct fee for the music. (Fighting free with free itself). Instead the cost is hidden within another subscription fee and / or subsidized by a third party looking for gains to their core products. Telcos have long been the best fit, but nearly exactly four years since TDC’s Play service was launched, telco subsidized music services are conspicuously thin on the ground. Spotify’s partnerships with Telia Sonera and 3, along with Deezer’s France Telecom tie-in and Cricket Wireless’ Muve Music are lonely examples.

So if the concept makes so much sense to the music industry and to the music services, why haven’t more bundled services come to market? The simple answer is economics: telcos (ISPs in particular) just can’t make the business case work. Margins are already tight, and in highly competitive marketplaces pricing is often locked into a race to the bottom. It is often just too difficult for a telco to build a consumer pricing package that doesn’t price it out of the mainstream market but at the same time covers the wholesale costs of rights licenses.

Of course music is viewed as a marketing tool rather than an ARPU tool by most telcos, so it is typical for a portion (sometimes all) of the costs are funded out of marketing budgets. But experience shows us that few telcos have been willing to swallow enough of the costs, seeing much better ROI on alternatives such as Apps and Games. A number of European ISPs have told me that they could only build a business case around a cost to the consumer of 2 euros a month, far south of what rights fees for unlimited music services require.

So how have Deezer managed to pull off the T-Mobile partnership? Here’s how:

Deezer have deep experience of integrating with telcos, knowing how their businesses work and understanding their needs

Deezer have a track record of making bundled telco offerings work

T-Mobile have identified the Austrian market as one in which they can achieve differentiation and market advantage through a bundled play. T-Mobile gets to call itself “the first operator in Austria to offer an unlimited music service in its mobile tariffs”, to gain and retain young mobile audiences.

The third factor is the key one. Without having a telco partner willing to go out on a limb, all of experience and assets in the digital music world add up to naught. But even once you’ve got a telco on board, making the project a success is no easy task. I’ve seen up close a number of telco music services nearly but not quite get to market because of complications with commercials and because of conflicting interests among partners. I sincerely hope that the T-Mobile and Deezer partnership is fruitful – the marketplace desperately needs more proofs of concept of the bundled music model. Without the ‘Third Way’ the music market will continue its unhealthy polarization between premium and free, leaving the squeezed middle high and dry.

Last night I participated in a Music Tank seminar on streaming music. It was a vibrant and valuable debate with a healthy diversity of opinion. Below are brief highlights of my opening keynote, including some exclusive data from record labels and from Spotify.

Streaming isn’t the paradigm shift, increased convenience of music access is

Streaming is no new thing. Napster, Rhapsody, YouTube have been with us for many years. What changed is that Spotify made it work with elegant simplicity, wrapped up in a consumer-friendly value proposition. Of course Spotify had timing on its side too, coming to market once most of us already had broadband and at a time when a rapidly growing share of us were getting smartphones with data plans. And of course timing is everything in business.

Timing aside though, we should be careful not to get hung up on the idea of streaming as an alternative format to the download. It is not. It is simply a different delivery mechanism for digital music, and when you factor in cached streams the distinction blurs further. Streaming versus downloading is tech speak. All music fans are interested in is being able to listen to the music they want, when they want, where they want.

Rebooting the conversation

Streaming music, and Spotify in particular, has been cause of much controversy and debate of late. I’ll come on to some of the causes later but it is first worth taking stock of what we actually do and don’t know about streaming.

What we know. Streaming is proving popular with consumers at a time when download growth is slowing. But many artists are not fully comfortable with the model and feel that they don’t get a fair enough deal. A dynamic which is complicated by the fact there are many different types of artist deals. Scale is key to streaming being successful (you don’t make money off dozens or hundreds of streams).

What we don’t know. We don’t know yet whether streaming cannibalizes sales. Whatever data you see on either side of the argument we are simply too early in the evolution of streaming to draw conclusions. There simply isn’t enough empirical data. We need a few more years yet and even then separating cause from effect is challenging at best.

What we suspect. It is looking like streaming does help reduce the amount people use file sharing. Again, the evidence isn’t definitive and there certainly isn’t sufficient evidence to suggest that the number of people using P2P etc is declining due to streaming, but intensity of usage perhaps. Smaller artists don’t seem to do that well out of streaming.

Access based services are the first post-transition technology products

Any new technology looks more like what came before than what will come next. After all we only have the past and present as our reference points. Thus when a new set of technologies emerge they begin with transition technologies. The first car was a steam powered horse-less carriage (see figure 2). It was a transition to the first internal combustion engine vehicle and it wasn’t until the 1950’s that we really started to see automobile form factors that had fully thrown off the horse drawn carriage heritage. Digital music is no different. The download was the steam powered horse-less carriage, a really useful transition tool to help us bridge the gap between analogue and digital, but just that. Access based services are the first steps towards the internal combustion engine, services that leverage some of the unique capabilities digital presents, rather than just using the web as a delivery mechanism. But it is still very early days, we are not even at the Model-T yet.

Putting streaming income into context

A number of record labels provided Music Tank with data illustrating the level of income across various platforms which can see here at aggregate level (see figure 3). This chart uses the income from a download as a base of 1 and then income from other sources as a multiple thereof, shown for labels and for artists. Note that the artist data is 3rd party licensing income only and does not reflect songwriter income etc. The data suggests that an artist requires 80 streams to match the income from one download. However data from artists suggests it is more than 200 streams. And this rate varies massively depending on the nature of the deal an artist has struck with their label (e.g. whether they are paid on a share of net income basis or on points) and what share intermediaries such as distributors take. It is also impacted by what deal the label has struck with a service. One smaller label claims, somewhat dubiously, that the rate for them is closer to 2,000 times. Whatever the exact rate (and there isn’t just one) you have to stream a lot of music to get the same income as a download, but much, much less than a web radio stream or radio listens. It take more than 5,500 national BBC radio listeners to generate the same income as one download in the UK

The labels’ take on streaming

Some record labels also provided Music Tank with some of their views on streaming and how they see it in the bigger revenue picture. Quickly summarized these are:

Markets with a strong streaming sector also often have stronger overall digital growth

Streaming is now growing more quickly than downloads

Streaming can be 50% of an artist’s digital revenue in some markets

Streaming consumers and download buyers do not strongly overlap

Streaming subscriber ARPU is often higher than download buyer ARPU

Spotify’s take on streaming

Spotify also put some data on the table (see figure 4) showing how a major global artist’s catalogue fared following the release of their album the same day to stores as to streaming. Obviously this data is positioned in the context of the cannibalization and ‘windowing’ debates (which I’ve contributed to here). The data doesn’t prove anything either way in terms of cannibalization (i.e. it could be interpreted as streaming activity does well when an album does well or it could also be viewed as lost buyer activity). However it does make a compelling case for the degree to which an artist’s back catalogue can be significantly boosted on streaming following an album release. There are some well voiced concerns that streaming favours big name artists, the head rather than the long tail, but if it does then it appears to do a good job of mining the long tail of the head!

The potential of Spotify’s Developer API strategy: an API for Music?

In the last 6 months digital music has two developments of potentially seismic proportions that through their subtle brilliance many haven’t yet appreciated their actual importance. One was Facebook’s content dashboard strategy. The other was Spotify’s Developer API. Of course APIs are no new thing, but if Spotify can reach a hundred million plus total users then its API has the potential of becoming a de facto API for music. Allowing developers to skip seeking licenses from rights owners and using Spotify’s instead. It is a crucially well timed move, coming just as investors are turning away from investing in services that require licenses (you may have noticed by now that impecable timing is one of Spotify’s strengths). Investors have tired of funding license advances for services that often, as in the case of Beyond Oblivion, don’t even make it to market. The labels still get their digital income but investors are left with a debt write off. Index’s highly influential Saul Klein went as far as stating that he won’t even invest in start-ups that require rights owner licenses.

Making the right comparisons

Crucial to the streaming debate is making the right comparisons.

Streaming does not = a download

Streaming does not = radio

But Streaming does = (download + radio) ÷ ??

The exact balance is in flux but the conversation must recognize that a direct comparison with either is off the mark. What we don’t yet know, and won’t for a couple of years, is whether streaming is pulling its users from green field and thus growing the market in a truly additive manner, or whether it is instead catalysing the organic digital transition, converting those consumers who would have gone digital anyway. If it is the latter then questions about the income from streaming users compared to other digital customers becomes a more pressing one. If it is the former then it frees us up to look at the scale picture with fewer reservations. If these customers simply weren’t ever going to adopt a different digital service then we can start to discuss how low we can bring pricing to drive even great numbers. The elephant in the room is that £/$10 is just too much for mainstream consumers. It needs to be close to £/$5 to really break into the mainstream. And you can only make that business case with genuine scale.

Conclusions

It is too early to make conclusive judgements about streaming affecting sales or piracy in the near-to-mid term

Long-term, music consumption will shift from ownership to access

The streaming debate is clouded by conflicting artist statistics and concerns

More artists need to be better sold the story by labels and by the services themselves, and some deals may even need revisiting. Greater transparency is key and record labels have a big role to play here – there’s only so much services can do themselves

Streaming is neither a radio replacement or a download replacement, it has some of the best of both

As for the legacy of streaming? Streaming will help make Facebook the most important player in the digital music market by 2013.

The key takeaway is that two of the oldest models in the digital marketplace (radio and retail) dominate in terms of users. Persistence certainly pays off for Pandora and Apple.

The iTunes Store is of course more important than Pandora for music industry revenue as its core function is to sell music. More than eight years after launch the iTunes Store remains by far the biggest success story in digital music sales, which given Apple’s relative lack of interest in innovating iTunes compared to their hardware, says as much about the competition as it does Apple.

There used to be a line of argument that Apple was a unique case because in its base of iPod owners it had converted the majority of the engaged, tech-savvy music aficionados that there were to be had. That Apple had already grabbed the addressable market for competitor services. Prior to the launch of the iPhone that base represented 88 million iPods sold. Since then though Apple has sold 0.4 billion more devices. The old argument just doesn’t hold water. Apple is doing something right – or rather many things right – that can turn (relatively) mass market consumers into savvy and engaged consumers. Something that the competition is patently not managing to do when it comes to digital music. And as much as it may be that Apple’s largely closed ecosystem is core to converting this behaviour into paid content behaviour, it is clear that the rest of the competitive marketplace needs to start learning how to better compete with Apple if the balance of power is ever to be altered.

Some methodological notes:

YouTube is not included because although it is by far the largest online music destination it is not a pure music service.

There is a mixture of paid and total users numbers in here. This chart is intended to give a sense of relative scale of service adoption across a diverse range of user experiences and business models.

The list is illustrative, not exhaustive. So there are major players such as Amazon, MelOn and smaller players like Sony Music Unlimited, rDio, MOG, 7 Digital, MusicLoad, We7 etc who are not on here.

The estimate for Apple’s total regular music buyers is based upon an assumption of 40% of the unique owner installed base of iPods, iPhones and iPads. That is to say that installed base numbers have been created for each device using replacement and new sales assumptions, and that then a unique installed base number was created using assumptions about multiple device ownership etc. The assumptions were cross referenced and checked in multiple ways including calculating the average number of downloads per buyer, cross referencing against total market level statistics for buyer penetration and digital download sales. The number is an informed directional estimate not a definitive measure.

I want to spend the next few minutes building the case that digital music is in a period of transition, a stage that presents us with a unique and ever narrowing window of opportunity to drive truly transformational change within the music industry. The fact that this panel focuses on both retailing and licensing is emblematic of the convergence, nay collision, of product models and business models. Collisions that help explain the current turmoil the music industry faces and in which the foundations for future growth lie.

So what exactly has gone wrong?

Firstly, digital retailing is looking increasingly unfit for purpose. It has failed in its key objectives, included in which is a failure to generate a format succession cycle. With the cases of the cassette and the CD, these formats were firmly in the ascendency by the time their predecessors were in terminal decline, and they then went on to drive periods of unprecedented prosperity. The same though patently does not apply to the paid download. However if you swapped out paid downloads for MP3s then the line would be off the chart. Consumer demand is not the problem. Current digital retailing formats failing to meet consumer demand is. And of course Apple’s closed iTunes ecosystem plays a massive role here too.

And if you look at the licensing side of the equation we have problems there too. Rights owners and artists both feel they don’t get enough from Freemium cloud services, and yet the services themselves feel that they pay too much to those very same parties to be financially sustainable. With cracks appearing right across the value chain it is looking increasingly like there are too few levers left to pull to fix the model.

Now as concerning as all this may be it doesn’t mean the end of the music industry, nothing like that in fact. Instead it is simply the end of the beginning: the end of the first chapter in the digital music business.

What we have now are transition products that did a great job of starting us on the path out of the analogue era but their usefulness is drawing to a close. The paid download is a sustaining innovation. For those of you not familiar with Clayton Christensen’s ‘Innovator’s Dilemma’ this refers to the principle that companies essentially have two ways to innovate their products. The first is that they can play the safe game where they tweak features and pricing to defend market share and revenue growth. These are sustaining innovations. Or they can take a gamble with disruptive innovations that have huge potential but also massive risk and can even shatter their existing business models.

Unsurprisingly most incumbent companies opt for the safe bet. But the safe bet is often anything but safe, as it leaves an innovation vacuum which is swiftly filled by the competition, or in the case of music, by the illegal sector. File sharing was the disruptive and transformational innovation of digital music, not the paid download. Added to this, innovation has been too heavily focused on business models and not enough on user experience. Now the music industry needs to create its own transformational innovation, putting user experience to the fore, before the informal sector does so….again.

So how do we get out of this situation?

Here’s my uber edited solution: two segments and three monetization models. Forget for a moment the complex multi variant segmentation schemes you’ve painstakingly constructed. Think instead of consumers as those who will pay and those who won’t. On the free side we have those consumers who are falling out of the habit of buying CDs and either haven’t discovered digital alternatives yet, or if they have they are perfectly happy with free services such as Pandora, Spotify, We7 and of course their killer app: YouTube. Here also are all those pesky freeloading pirates – they’re not lost customers, but they’re probably not about to start paying 9.99 a month for Spotify Premium either. And on the other side we have the highly engaged music aficionados. This used to just be the ‘50 quid bloke‘ but sites like Pledge Music are creating a new generation of younger music fans who will pay good money for recorded music when they establish a direct relationship with artists.

The way to monetize these three groups is threefold: at the bottom of the hierarchy are ad supported free services for the passive majority and the freeloaders, where the contagion of free is legion; at the top there are premium services for the much smaller numbers of engaged aficionados (but they need an entire new generation of music products that are interactive, social and connected, a true successor to the CD – if all they have to chose from is 9.99 a month streaming rentals then this segment will dwindle to the few percentage points of consumers who actually pay those services); and in the middle we have the best balance of scale and ARPU, with subsidized services where third parties such as telcos and car manufacturers pick up some or all of the wholesale cost to make music feel-like-free or close-to-free for end users. This is the monetization model which will pull in many of those who won’t pay and also those who are in danger of falling out of the habit of paying.

So there you have it: 2 segments + 3 monetization models = the foundation for a prosperous music industry in 2012 and beyond.

With the much anticipated US launch of Spotify and the successful IPO of Pandora there’s a very palpable sense of momentum in streaming music. And that’s great news, the future of music revenues will depend upon a successful transition from distribution based models (downloads, CDs etc) to consumption-era models (on-demand streaming etc.). Yet, there’s a growing sense that the current Freemium business model just isn’t fit for purpose.

I’ve written before about the challenges of squaring the consumption circle (see my post here for more). There is a direct tension arising from record labels feeling they don’t get enough from ad-supported music, and from the services themselves feeling that they actually pay too. To complicate matters even further, it is becoming increasingly apparent that artists aren’t getting enough out of ad-supported music either.

Slicing the Digital Income Pie

Singer / songwriter Benji Rogers of Marwood (and who also happens to be the founder of the great direct-to-fan funding music site Pledge Music) generously offered to share his digital revenue data to illustrate how his income spreads between different music services.

Looking at Benji’s digital music revenue for March and April (see figure 1) the glaring disparity between download stores and streaming services is immediately apparent. In terms of units of activity (i.e. a stream or a paid download) streaming services are way out in front, with 92% of total units for the period, yet in revenue terms the relationship is reversed, with them accounting for just 3% of total income. (You can read more about Benji’s digital music income here).

Now of course streaming based services are always going to generate a significantly lower unit of income than a download, but the inverse income-to-unit relationship here is misaligned to the extreme.

What Happens If / When Downloads Go Away?

The other side of this equation is the vastly important role that downloads play in artists’ recorded music income. The download revenue is effectively bringing the income dynamics of the old CD model into the digital equation.

But there is also massive risk with the download dependency. Download sales growth is slowing and there is little evidence that the 99 cents download model translates well outside of the iTunes ecosystem. Worse still, the current momentum in digital music business models and behaviour is in streaming not downloads. Take a look around: Amazon, Google and of course Apple have all jumped on the locker bandwagon. And as Benji’s data illustrates painfully well, streaming is where consumers are going too. While downloads may not disappear entirely, their role is set to lessen markedly in the midterm future and most of the alternatives in play from the big three players generate much lower income for artists.

Premium, Ad Supported, Freemium…Streaming Just Isn’t Adding Up for Artists

And to be clear, this isn’t just a problem with Freemium. Streaming services as a whole just aren’t delivering enough income for artists. Spotify is much maligned for the raw deal it is perceived to give artists, yet when you look at the average-pay-per stream Spotify actually pays out more than that darling of premium services Rhapsody (see figure 2) despite the majority of Spotify’s streams being ad supported rather than premium (something feels broken there).

The simple fact is that the disparity between paid downloads and streaming is unsustainable. It just isn’t tenable that 3 paid downloads from Amazon can still deliver 50% more revenue than all the streaming services combined over the same period and yet have less than 1% the activity level of those services.

Is Freemium No Longer Fit for Purpose?

No one in the Freemium value chain thinks that they’re getting enough income: not labels, not publishers, not artists, not the services themselves. It looks increasingly like the Freemium model itself is fundamentally flawed, that any fix will do little more than paper over the cracks. And the new wave of locker services are only marginally better. They share the same fundamental revenue share dynamics when compared to download income (for all parties).

So what is the answer? As I said in my June Midem post (click here to read more), first and foremost business models and products must be innovated. There simply aren’t enough levers left to pull in the ad supported streaming business models to fix the problem. That doesn’t mean that services such as Spotify, Pandora and We7 don’t have a future, they absolutely do, but their future lies in successfully bringing in business partners to subsidize premium tiers of their businesses to make music feel-like-free or close-to-free for mainstream customers (see my previous post on Digital Music’s Third Way for more on this). Spotify’s US launch will bring a great new music experience to US music fans, but Spotify will need partnerships like it has struck with Virgin Media, 3 and Telia Sonera in Europe if it is going to be sustainable.

But most importantly we need a new generation of music products that leverage social, user participation, access models, multimedia and device connectivity to the full.

Ad supported streaming can evolve, it doesn’t need to be the Neanderthal of digital music’s evolutionary chain, but unless evolution happens quickly there is a very real risk that many artists will start seeing their recorded music careers face extinction.

[Please note that this post first appeared on the Forrester Consumer Product Strategy blog. Over the coming month or so I will be migrating all of my activity there. I will soon be posting new information here for you to amend your feeds and subscriptions. Thanks]

As I posted earlier in the month, the music subscriptions space is going through an important period of transition. It took much of the last decade to realize that the 9.99 premium rentals model was only ever going to appeal to a niche of music aficionados, and though global premium music subscribers total 8.25 million, we’re still no closer to mass market appeal for premium subscriptions. And yet we have a host of new entrants including, MOG, Spotify Premium, We7 Premium, Sky Songs, Virgin Media etc etc.

So what’s changed? Well, both a little and a lot.

The niche audience is getting bigger. Firstly, the appeal for premium subscriptions is still a niche addressable audience of tech savvy music aficionados, but that audience is growing. It’s still far from mass market (and never will be) but it’s a more attractively scaled base now. A few million per major music market perhaps. For a company like MOG that’s plenty enough addressable market. Also improvements in consumer technology and connectivity make it easier to deliver a high quality on-the-go cloud based experience, a crucial asset.

New routes to market. Perhaps the most important change though is that numerous new channel partners are emerging that can help shoulder the to-consumer cost. ISPs, mobile operators, device manufacturers, even brands all are becoming realistic partners for subsidizing premium subscriptions, in turn reducing the price point to an extent where appeal is much broader. The music industry is waking up to the fact
that a recurring household music purchasing relationship is much more valuable and secure than ad hoc individual spending and illegal downloading.

MOG has an additional crucial asset: the service is inherently social. Regular readers will recall that I posted about the concept of ‘putting the crowd in the cloud’, that social interconnectivity in cloud based services will become a crucial component of music discovery and engagement. MOG joins those dots.

Those assets alone though may not be enough. If MOG is to steal serious market share in the UK it will do well to investigate the unique
range telco partnership opportunities that the UK presents due to the government’s strong(ish) stance on making telcos partners in tackling music piracy. A subsidized MOG service from BT, integrated into their IPTV boxes and xBoxes, for example, would be a really enticing prospect.

(And a sign of the times, MOG is being talked about as a potential ‘Spotify-killer’….whatever happened to being an ‘iTunes-killer’…they’re still the ones that own three quarters of the premium digital music business…)

The news that Spotify’s mobile app is now available for the Android platform, coupled with an anticipated Autumn US launch, are both part of the music service’s inexorable rise and media interest. Spotify undoubtedly has momentum and potential in abundance. But, even without considering the issue of cash burn, it is also important to keep a sense of scale. Spotify has done a great job of acquiring a sizeable audience after a short period of time, but needs many users more before it can be considered on a par with some more established services that get a lot less attention (these days at any rate).

In the chart below I have mapped the number of users of Spotify and a number of other key free music services, each from launch. What is clear is that Spotify has made a solid start is growing at a stronger rate than Pandora was at the same stage. If Spotify ever reaches Pandora’s scale and business model viability, it will rightly be considered a success.

But it is also clear that other services like Last.FM and imeem grew more quickly. And just to put the absolute scale of Spotify into perspective, the Pandora iPhone app alone is mapping almost exactly in line with Spotify’s entire user base. (No coincidence of course that Spotify see the iPhone app as a crucially important ticket to further success).

So what can we conclude from these numbers?

Extrapolating Spotify’s early user growth suggests that if it is sustained it could reach the 20-30 million user range within 2 years

A US launch will significantly accelerate audience growth (all of the other services mapped here have US reach. imeem and Pandora have reached their scale in the US alone)

Spotify will need to accelerate its revenue model maturation if it is going to be able to sustain this projected level of growth.

The last point is key. All of the other services in the chart have had to deal with the challenge of audience cost sustainability:

imeem has had well publicized financial difficulties with WMG writing off millions of debt

Last.FM recently closed its free service to countries it couldn’t operate in profitably

Pandora closed its non-US operations when it couldn’t strike deals with rights owners that would enable it to operate profitably in international markets. Pandora has long focused on building financially sustainable audiences, a strategy echoed by We7 in the UK.